Rollercoasters

When I’m working with a client, we spend a significant amount of time speaking about risk.  The risk you need to take to achieve your objectives, the ability that you have to take risk given the timeframe and investment horizon needed in order to achieve your goals and objectives, and finally, the risk that you DESIRE to take.

When I say “Desire to take risk”, I am speaking about what many advisors call “the stomach test”.  How much risk can you stomach?  What level of risk begins to make you uncomfortable?  I usually put it in this fashion…

If you don’t like rollercoasters, you probably don’t go to Cedarpoint (the rollercoaster capital of the U.S.).

Consequently, my role as your advisor is to help you determine what rollercoaster to get on.  I believe the success (or failure) of a client’s investment strategy is based on their ability to stay in their seat.  As in the case with a rollercoaster, if you stand up and try to exit at the wrong time, things might get messy.  Just like the announcements say, “Stay in your seat, keep your hands in the car!” This doesn’t mean that we recommend our clients buy and hold investments; rather we recommend a strategy based on buying and rebalancing the risk when necessary.  More on this some other time.  Now back to rollercoasters…

I had a message from a client yesterday regarding the drop in the U.S. market (DJI over 400pts by market close).  We likely weren’t going to have an opportunity to speak by phone, so I composed this email regarding her specific portfolio. (As additional background, she has been receiving unsolicited financial advice from a family member to place ALL her investments in silver).  Here was my response:

“Thanks for your message.  I know that this bump in the market probably scares you, and you probably guessed that I was going to say this next, “I don’t know what today will bring”.

Let me try to put it in perspective.

First, the broad markets around the world were down yesterday, mostly on “gloomy” financial news from China which drove down their markets significantly causing a ripple effect around the globe.  We are, of course, a global economy, but not so much so that everything moves together exactly the same.  They don’t.  The asset classes you’re invested in are not highly correlated, thus your risk is spread into MANY different baskets, AND you have a portion in bonds which provide you a stable base to grow from.

Here are some key things that should give you a little comfort:

The Dow Jones down 3.29%; Russell 2000 down 3.7%; S&P 500 down 3.47%; NASDAQ down 3.86%; Gold / Silver Index down 6.96%; Oil Index down 3.5%.

Your portfolio, down about 2.8%.

Think of it this way: you lost approx. 2.8 cents on every $100 you have invested.  Other investors likely lost more than 3.5 cents per $100.  This means you lost roughly 25% less than they did (had you been invested in silver, you would have lost roughly 249% as much-more than 2 and 1/2 as much.

Now, it may not seem like much comfort to be speaking about how “little” you lost in the market yesterday.  BUT, we spoke about volatility (the movement of markets up and down).  There will always be this movement.  The important thing is to diversify your assets so that they aren’t in one basket, and in this way, your assets are prudently invested.  (By the way, the gold / silver basket yesterday was the BIGGEST loser in the index list that I reviewed this morning).

I know its hard to not be distracted by the financial market news, especially when the markets have a day like yesterday. (Yours won’t likely be the only email or call I will have today!) but rest assured, you are WELL diversified, and over the long run, I believe this is the BEST strategy for you given your comfort, need, and desire to take risk.”

I can tell you that I appreciate when my clients share with me that they are scared or concerned.  Volatility is a scary thing, but necessary (and unavoidable) for most client investment strategies and financial plans.

My advice?

Work with a Fee-Only advisor to develop and implement a prudent investment strategy that supports your fiancial plan and considers the impact of taxes.

Please stay in your seat and keep your hands in the car!

From financial wisdom, better stewardship.

Posted by Wayne Titus
Financial Wisdom for Families • Financial Wisdom for Business Owners • Stewardship • (0) Comments • Permalink